A federal appeals court in San Francisco has revived a lawsuit against a unit of AT&T and the company's 401(k) plan fiduciaries, saying a Los Angeles district court judge erred in rejecting certain allegations of ERISA violations against the defendants.
Plan participants initially sued in November 2017. U.S. District Court Judge Virginia A. Phillips dismissed the complaint in 2018, but she gave plaintiffs the opportunity to amend their complaint.
In September 2021, the judge granted summary judgment for the defendants based on the plaintiffs' third amended complaint in the case now known as Bugielski at al. vs. AT&T Services Inc. et al. AT&T Services Inc. is the plan administrator.
A motion for summary judgment is usually filed after the parties have completed discovery, giving a judge the opportunity to review details of a case. A motion to dismiss, usually requested soon after a complaint is filed, argues that the plaintiff has failed to state a claim.
AT&T Inc., an original defendant, was later dropped from the complaint via agreement of the plaintiffs and defendants.
The plaintiffs appealed, and a three-judge panel of judges for the 9th U.S. Circuit Court of Appeals ruled on Aug. 4 that the district court judge should reconsider some allegations made by the plaintiffs.
The panel said the defendants violated ERISA's rules on prohibited transactions and on duty of prudence in managing the plan's use of a self-directed brokerage service, BrokerageLink, and its relationship with Edelman Financial Engines, an investment adviser.
The appeals court asked the district court judge to review whether revising the BrokerageLink contract was a prohibited transaction under ERISA or whether it qualified for an exemption under this provision. The judges also asked the district court to review whether the defendants adequately monitored the compensation Fidelity received through BrokerageLink and Edelman Financial Engines.
Fidelity Investments, the plan's record keeper, and Edelman Financial Engines aren't defendants in this class-action lawsuit.
"Plaintiffs allege that AT&T failed to investigate and evaluate all the compensation" that Fidelity received as record keeper, the appeals court judges wrote.
In ruling for the defendants, the district court "concluded that plaintiffs' prohibited-transaction and duty-of-prudence claims failed because AT&T had no obligation to consider this compensation," the appeals court judges wrote. "It also concluded that AT&T was not required to disclose this compensation on its reports to the Department of Labor."
However, in remanding the case to the district court, the judges wrote that the defendants were "required to consider this compensation and report a portion of it."
Although the defendants cited decisions by two other federal appeals courts — in 2019 and 2022 — that rejected prohibited-transaction allegations against defined contribution sponsors, the appeals court judges disagreed. They also disagreed with the defendants' citing a 1996 U.S. Supreme Court case favoring defendants in a defined benefit plan allegation of prohibited transaction.
"We conclude that these cases either do not support AT&T's position, or we decline to follow their reasoning." the judges wrote.
"AT&T needed to consider the compensation Fidelity received from Financial Engines and BrokerageLink when determining whether 'no more than reasonable compensation' was paid for Fidelity's services," the judges wrote. "The district court did not engage in this analysis."
The judges supported the district court's ruling that the defendants adequately reported compensation from BrokerageLink on AT&T's Form 5500. They reversed the district court's ruling that AT&T had adequately reported compensation from Edelman Financial Engines, sending this allegation back to the district court.
AT&T Retirement Savings Plan, Dallas, had $53.8 billion in assets as of Dec. 31, 2021, according to the company's latest 11-K filing.